THE ECONOMIC SITUATION IN SOUTH VIETNAM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700010043-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: December 22, 2016
• Document Release Date: September 19, 2011
• Sequence Number: 43
• Publication Date: May 1, 1971
• Content Type: IM

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Secret
DIRECTORATE OF
--INTELLIGENCE--
Intelligence Memorandum
The Economic Situation In South Vietnam
Secret
ER IM 71-92
May 1971
Copy No.
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WARNING
This document contains infonnation affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP 1
F'Jud.d liar, auior,o1;c
downgrading and
dedmiifwiinn
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
May 1971
INTELLIGENCE MEMORANDUM
THE ECONOMIC SITUATION IN SOUTH VIETNAM
Highlights
1. Economic activity in urban areas of South Vietnam is in a
quiescent period as evidenced by stable prices, tight money, little
speculation, and low demand for imports. The money supply is expected
to increase considerably during the next few months, but it does not appear
that this increase will add greatly to inflationary pressure over the short
run. The fairly long period of stability in retail prices and in the value
of the piaster on the black market reflects confidence among consumers
and businessmen that stability will continue.
2. Output of South Vietnam's two most important agricultural'
commodities - rice and rubber - increased substantially in 1970. The final
estimate of the rice harvest confirms that the 1970/71 crop was the largest
in South Vietnam's history. The 12% increase in output resulted almost
entirely from greater use of the new high-yielding varieties of seed. The
rise in rubber production was the first since 1961 and is expected to be
exceeded this year.
3. Charts on foreign exchange reserves, money supply and prices,
import licensing, currency and gold prices, and the government budget
follow the text.
Discussion
Recent Developments
4. During the past several months there has been a general lull in
business activity in Saigon and other urban areas. As evidence of this
Note: This memorandum was prepared by the Office of Economic
Research.
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development, prices have been stable since last July, money is said to be
tight, speculative activity appears to be at a minimum, and demand for
imports has been lagging. Although the money supply - stable during
February and March - is expected to increase considerably during the next
few months as government expenditures outpace revenues from imports,
many businessmen and bankers reportedly believe the lull will persist. Past
experience indicates that prices usually respond only gradually to changes
in the money supply and that other factors, such as inventory levels,
imports, and the degree of general confidence, also are important. Over
a period of years, however, increases in prices have roughly paralleled those
in the money supply, and it is clear that the expected growth of the money
supply during the coming months is legitimate cause for concern about
prospects for stabilization later this year and in 1972.
Import Demand
5. One of the major factors in the current lull has been the low
demand for imports. Not only was demand for imports less than anticipated
during the first quarter of this year, but also importers have shown a clear
preference for goods coming in at lower effective exchange rates as opposed
to luxury goods which come in at the higher parallel exchange rate and
carry high taxes as well. Import licensing averaged about $40 million a
month (excluding PL-480 imports) during the first quarter of this year,
or about $10 million a month below expectations. Although licensing
jumped to about $7'1 million in April, this surge was mainly the result
of periodic large orders for basic items such as fertilizer, cement, and
petroleum products.
6. There usually is some decline in import licensing following the
burst of orders for the Tet holidays, but there have been additional factors
at work this year as a result of the economic reforms enacted by the
government last fall. Speculation about devaluation was dampened, and the
raising of interest rates and the requirement for advance deposits on imports
put a financial squeeze on importers. Demand for imports has probably
lagged also because savings have risen. Between mid-September 1970 (when
commercial bank interest rates were raised) and the end of March 1971,
savings and time deposits increased almost 90%. Interest rates on Treasury
bills were raised on 5 March, and during March public and commercial bank
holdings of Treasury bills increased 7%. Finally, the long period of price
stability probably has influenced the level of licensing.
Prices
7. On 10 May, retail prices in Saigon - which had begun to stabilize
even before the October 1970 reforms - were still only 3.5% above the
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level of last July. There is no simple explanation for the behavior of prices
during the period. Among the reasons for stable prices are the relatively
slow growth in the money supply during 1969 and much of 1970, the
stability of retail rice prices since last June, J and the apparently adequate
supplies of other domestically produced items. The reforms of last fall also
have had an impact by curbing speculation and making savings more
attractive. Moreover, consumer expectations about inflation probably have
been an important stabilizing influence. When prices begin to stabilize,
expectations of continued stability tend to be self-fulfilling.
8. Not surprisingly, the USAID index that measures only prices of
imported commodities has been less stable. Between July 1970 and April
1971 the price index for imported commodities increased 18%. Imports
were the center of considerable speculative activity until the fall of 1970
and were directly affected by both the October and March 1970 reforms.
Currency Black Market
9. Prices on the Saigon black market in currency have been relatively
stable for the past six months. On 10 May, the dollar was quoted at 392
piasters, or only two piasters above the average price of last December.
The rate for MPC (scrip), which has hovered below the legal rate of 275
piasters per dollar since mid-February, was 261 piasters. The price of a
dollar's worth of gold leaf on 10 May was 506 piasters.
10. There has been an enormous increase in legal sales of piasters
since last October, when the official rate of exchange for MPC (the
accommodation rate) was changed from 118 to 275 piasters per dollar.
South Vietnam's monthly earnings of foreign exchange from conversions
by US personnel rose to an average of $8.6 million during the period from
November 1970 to March 1971, compared with about $2 million during
July-September 1970. Moreover, this increase occurred in the face of a 15%
decline in the number of US military personnel in Vietnam between
September and February.
11. Despite the reduced supply of dollars, however, the black market
rate for dollars has been remarkably stable. This is because various factors
favoring the shift of assets toward piasters have resulted in a fall-off in
the demand for dollars. Following the economic reforms last fall, importers
(who have been the most important faction in the black market) were
squeezed for funds because of higher interest rates on loans and the advance
deposits required for many imported items. As a result of this squeeze,
I. Rice accounts for I7% of the weights used to calculate the USA ID
retail price index.
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SEURET
they were less able to finance purchases of dollars. This factor was probably
less significant during the first quarter of 1971, as import licensing declined.
Another factor responsible for the decreased interest in
obtaining dollars has been the steady increase in savings and time deposits
since interest rates were raised last September. The increase in savings is
an indication of a growing confidence in the piaster and overall price
stability, and this confidence is now manifest in a less volatile currency
black market.
1970/71 Rice Crop
12. The final official estimate for South Vietnam's 1970/71 rice crop
confirms that this harvest was the largest in South Vietnam's history. On
a per capita basis the crop was almost as large as it was in 1964, the last
year in which the Vietnamese were self-sufficient. Nevertheless, because of
distribution and marketing problems and possibly an increase in
consumption over the years, South Vietnam already has imported some
rice this year and may need additional imports this fall. During the crop
year ending 31 May 1971, paddy production increased 12% to reach 5.7
million metric tons. Relevant production data for this and last year's crops
are shown in the following tabulation.
1969/70
1970/71
Paddy production
(thousand metric tons)
5,115
5,715
Cultivated area
(thousand hectares)
2,430
2,510
Yield per hectare
(metric tons)
2.10 2.28
13. Almost all of the increase in production and yields resulted from
greater use of high-yielding varieties of seed. The area planted to new seeds
more than doubled this year to 500,000 hectares, or one-fifth of total rice
hectarage. There presumably was some reclamation of abandoned lands, but
most of the increase in cultivated area was the result of increased double
cropping using the new seeds. The average yield from the new seed
varieties - IR 8, IR 5, and IR 20 - has not been reported, but even if
it is no greater than the 4.7 tons per hectare of last year, the new seeds
would have accounted for about 40% of the total output of paddy. The
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data also show, however, that the average yield from traditional varieties
declined slightly. Such a decline may have stemmed from the flooding
that occurred in the northern coastal provinces last fall.
14. The average yield from the new seeds generally has been at least
double that from the traditional varieties grown in South Vietnam. Much
more spectacular results, however, have been achieved in isolated instances
in the Delta. Three Delta farmers competing in a contest this past year
each produced a total of 30 tons of rice in three successive crops from
one hectare of land using the new seed.
Rubber Production
15. South Vietnam's rubber production increased in 1970 - the first
annual increase since 1961.Output from the large plantations, which usually
account for about 90% of total production, rose 8% from 25,200 tons to
27,100 tons. Total output (including smaller plantations) probably
amounted to about 30,000 tons. Rubber production in 1970 still was less
than two-fifths of the average level of output during 1960-63, but is
expected to increase substantially again this year.
16. Improved security was the major reason for increased output in
1970. Better security in Military Region 3, where rubber plantations are
concentrated, has permitted the reopening of plantation roads and the
reexploitation of some abandoned tree stands. Some of the increase
probably came from more intensive tapping on particular plantations.
17. An additional stimulus to production was provided last October
by the establishment of the parallel market exchange rate for exports, which
take up about 90% of output. Prior to the introduction of the parallel
market rate of 275 piasters per dollar, rubber was exported at the rate
of 138 piasters per dollar, or the official exchange rate of 118 piasters
plus an export subsidy of 20 piasters. Planters believe the new exchange
rate not only will put operations in the black again but also will allow
them to expand. According to representatives from the large French-owned
plantations, Vietnamese rubber still is in great demand in the world market.
18. As a result of the improved earnings, planters reportedly were
able to give workers a 40% wage increase as well as a larger bonus for
each kilogram of latex collected. The plantations expect the higher wages
and improved security situation to enable them to hire several thousand
additional workers. Employment on the rubber plantations reached about
30,000 at its peak in the early 1960s, but has since declined to about
10,000 workers, most of whom are women. With sufficient manpower, the
planters estimate that the exploited area - and production - can be
increased by almost 50% in 1971 simply by tapping existing tree stands
more completely and more efficiently.
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SOUTH VIETNAM
Foreign Exchange Reserves*
Million US Dollars
1965 1966 1967
'EKCIuding holdings of commercial banks
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SOUTH VIETNAM
1000 Indexes of Money Supply and Saigon Consumer Prices
10 May
708
'USAID monthly average retail price index for Saigon
"Data are for end of month
I I I Il I I I 1 11
MAR APR MAY
1971
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GOVERNMENT BUDGET'
Billion Piasters
Advances from
Nation.3l Bank
Foreign Aid
Domestic Taxes
Import Taxes
EXPENDITURES
Civilian
Military
1970 1971
Preliminary Plan
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IMPORT LICENSING
Million US Dollars
To lot
407
Commercial Import
Program
Total
660
Total
531
Total
624
Total
740
1970
Total
641
'January through
March only
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SAIGON
Free Market Gold and Currency Prices
Piasters Per US Dollar
600 ,.nl
GOLD Basis: gold leaf worth
$35 per troy ounce
US $10 GREEN
US $10 MPC Military Payment
Certificates (scrp)
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